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Directors of San Francisco-based Fitbit Inc. will have to defend investor allegations that they knew about major problems with the company's leading products ahead of an initial public offering in 2015, after a Chancery Court judge on Friday refused to dismiss derivative claims of insider trading.

The lawsuit alleges that Fitbit's brass discovered widespread issues with the San Francisco-based fitness company's heart-rate monitoring technology as early as January 2015 but failed to disclose the scope and severity of the problem before its IPO that November, which raised $416 million. According to the complaint, directors used that knowledge to structure the offering in their favor, and sold 6.2 million shares for a total of $115 million.

The directors had asked Vice Chancellor Joseph R. Slights III to toss the case last June, arguing that the deficiencies with its PurePulse platform were well-known in the market and that Fitbit's internal response did not conflict with public statements and an aggressive marketing campaign in the run-up to the IPO.

Slights, however, ruled that plaintiffs Anne Bernstein, Michael Hackett and Bright Agyapong had made an early showing that PurePulse's design flaws—and the company's inability to fix them—qualified as “material non-public information” and that Fitbit's directors may have acted with scienter in selling off their shares.

The Delaware case is not the first to stem from Fitbit's handling of defects in PurePulse, which was featured in products accounting for more than 80 percent of the company's revenue. A federal judge in California denied Fitbit's motion to dismiss a consumer class action over the tech, and the company settled a federal securities lawsuit in April, after U.S. District Judge Susan Illston of the Northern District of California found that a steep drop in Fitbit's stock price supported allegations that the market was unaware of the problems with Fitbit's PurePulse platform.

Slights cited Illston's finding Friday, saying that plaintiffs had supported claims that the details were not available to investors until early 2016.

“The selling defendants respond to that finding with several reasons why the stock price declined the way it did. Those reasons may well prove true on a developed record,” he wrote in a 52-page memorandum opinion.

“For now, however, just as the federal court found it plausible that the market's discovery of the PurePulse issues prompted the decline in stock price, I find that the causal connection is pled with particularity and is reasonably conceivable. Plaintiffs have adequately pled that the information at issue was material and nonpublic.”

On the second facet of insider trading, Slights said the complaint supported a reasonable inference that the directors had acted with knowledge of their alleged wrongdoing. Slights noted that the pleading stage does not need a “smoking scienter gun” to support a claim. But, he said, the complaint clearly laid out that the company was working unsuccessfully to fix serious flaws, while consistently touting PurePulse's success to the investing community.

“These well-pled facts, combined with the nature, timing and size of the offerings, adequately support a reasonable inference that the selling defendants sought to make trades based on nonpublic information,” he said.

An attorney for the plaintiffs declined to comment Friday on the ruling, and an attorney for the directors did not immediately respond to a call seeking comment.

The plaintiffs are represented by attorneys from Kahn Swick & Foti in New Orleans, Schubert Jonckheer & Kolbe in San Francisco and Shapiro Haber & Urmy in Boston. Wilmington firms Andrews & Springer and Rosenthal, Monhait & Goddess are acting as Delaware counsel in the case.

The Fitbit directors are represented by Morrison & Foerster in San Francisco and Young Conaway Stargatt & Taylor in Wilmington.

The case is captioned In re Fitbit Stockholder Derivative Litigation.